Do capital controls make gross equity flows to emerging markets less volatile?

• Capital controls on FDI outflows lower volatility of FDI inflows.
• Neither inflow nor outflow controls on FPI affect volatility of FPI inflows.
• Controls on FPI outflows have a dampening effect on volatility of FDI inflows.

The impact of capital controls on the magnitude of international capital flows has been a subject of much interest and research. Far fewer studies have examined if and how capital controls affect the volatility rather than the level of capital flows. This paper investigates whether capital controls affect the volatility of gross equity inflows (direct investment and portfolio investment). We are interested in both the effects of controls on equity flows on the volatility of corresponding inflows (own effects) as well as the impact of controls of a certain type on another component of capital flows (cross effects), so as to ascertain whether there are any unintended consequences. Using a panel consisting of 37 emerging market economies over the period 1995–2011 we find a highly robust result that controls on FDI outflows appear to lower the volatility of FDI inflows.